Hikes of TP and Jacks Ratings CGI Inc. (
) is “well-positioned to benefit from digital transformation tailwinds,” said Desjardins Securities analyst Kevin Krishnaratne ahead of the July 28 release of its third-quarter financial results.
“We look forward to a return to revenue growth, continued EBIT margin expansion and positive commentary on trends to close out the year given momentum in the IT services industry, as has been recently reported by many peers,” he said.
Mr. Krishnaratne estimates the Montreal-based form will report revenue of $3.01-billion for the quarter, up 3.4 per cent year-over-year a constant-currency basis and reversing recent declines (1.7 per cent in the second quarter and 3.6 per cent in the first quarter).
“We expect adjusted EBIT of $480-million for a margin of 15.9 per cent, reflecting slight margin expansion from 15.8 per cent in 2Q as CGI’s revenue mix skews further toward higher-margin managed services and increases its mix of IP,” he said. “One area to watch is the potential for rising tech talent costs, which many in the industry, including CGI on its last earnings call, have recently discussed. Given CGI’s strong cash flow profile (we expect $452-million in CFO in 3Q), estimated cash balance of $1.4-billion and $1.5-billion revolver, the company is well-positioned to execute on its build-and-buy strategy as it looks to double its business over the next 5–7 years.”
Though he trimmed his full-year 2021 earnings and revenue projections, Mr. Krishnaratne hiked his target for CGI shares to $130 from $120. The average on the Street is currently $120.87.
“CGI shares are up 13 per cent year-to-date but are roughly flat from pre-pandemic highs (January 2020),” he said. “Recent industry commentary suggests continued momentum in the IT services space, with recent earnings for global peers and tech vendors ahead of Street estimates. With the stock now trading at 11.5 times calendar 2022 EBITDA vs peers at 10.5 times (12.5 times ex outliers) and Accenture at 17.0 times, we see a unique buying opportunity for a leading SI well-aligned to capitalize on digital transformation trends globally.”
Elsewhere, BMO Nesbitt Burns’ Thanos Moschopoulos raised his target to $128 from $121 with an “outperform” recommendation.
“We believe that CGI is benefiting from a healthy IT services spending environment, as verticals/geographies that were challenged during the pandemic have been recovering, and as clients have been ramping up investment in new initiatives (e.g., digital transformation and migration to the cloud),” said Mr. Moschopoulos. “We believe Q3/21 will demonstrate a return to year-over-year organic growth and view the stock’s valuation as attractive. We’ve marginally trimmed our estimates, reflecting updated FX assumptions.”